Report
of
High Level
Expert Committee
on
Corporate Bonds
and
Securitization
December 23, 2005
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CONTENTS
Sl. No. Chapters Page
1 Introduction 3
2 Global Corporate Bond Markets 17
3 The Indian Corporate Bond Market 42
4 Asset Based Securities Market 108
5 Summary of Conclusions &
Recommendations
131
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CHAPTER I
Introduction
1. The Corporate Debt Market in India is in its infancy, both in terms of
microstructure as well as market outcomes. Primary issuance market is dominated
by non-banking finance companies and relatively small amount of funds are
raised through issuance of debt papers by manufacturing and other service
industries. Bank finance is the most sought after path to fulfil the funding
requirement of these companies. Secondary market activities in corporate bonds
have not picked up. Efforts of Securities Exchange Board of India (SEBI) and the

of the country. Through an appropriate RBI fiat, the turf of the DFIs was also
protected, until recently, by keeping commercial banks away from extending large
sized term loans to industrial units. Banks were expected to provide small term
loans to small-scale industrial units on a priority basis.
4. Till recently, public sector companies (PSUs) and DFIs had received budgetary
support from the Government. The Corporate sector also raised funds from the
retail markets by way of term deposits just as the banks do. This has been an age-
old system quite popular with several corporates. The company statute permits
corporate entities to raise public deposits within certain limits.
5. The corporate units which usually raise funds through public deposits also did not
show much interest in issuing bonds although they could possibly raise more
money through market borrowings than through public deposits. During the last
several years several good credit-rated corporates have been showing interest in
raising funds by way of private placements of debt from big lenders/investors or
popularly known as Qualified Institutional Buyers (QIBs) but they have not
shown any keenness to tap the public issue market. One of the reasons why they
do not like to make public issue of debt appears to be that the regulatory
requirements including quality and the type of disclosures are more rigorous or
onerous in the case of public issues. Although the interest rates they pay on such
placements would be equally attractive to retail investors, corporates have not
shown much interest in the retail investors. As per the current regulations as long
as the investors in a debt instrument are up to 50, private placement route could be
adopted. Market feed back suggests that the corporates are not happy with this
regulation and a number of them are trying to find ways for bypassing the
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requirement of distributing debt among not more than 50 investors. The usual
method adopted by a corporate is to privately place its debt issue to less than 50
investors in the first place so that at the next stage these investors in turn sell the
issue to much larger number of investors in the guise of a secondary market

route and have been servicing retail investors even when their numbers are very
large. But when it come debt finance the same corporates have shied away from
the hassles of servicing large number of investors as they find it highly convenient
to meet their requirements of debt finance by relying on a limited number of
lenders that provide both short term as well long term funds. This is also the main
reason why the corproates have been relying on private placement route for debt
rather than tap the retail debt market.
10. Since the primary corporate debt market did not develop efficiently and remained
purely an institutional market with limited disclosure, the secondary market for
corporate debt also did not develop on healthy lines. The secondary market has
remained highly illiquid with only a limited number of banks/institutions
participating in the same. Since banks have surplus funds and are not able to
identify good borrowers they are ever on the look out for good quality paper in
the market and they would prefer to hold the papers till maturity rather than
trading in the same.
11. It is understood from the market sources that the corporate bond market in India
continues to be largely an OTC market in which some large banks and mutual
funds are the main participants. The retail investment in corporate bond market is
negligible. Looking into trade information released by NSE, it is observed that
negligible trade takes place either on the exchange platform or reported to it after
the trades are brokered in the OTC market. NSE’s WDM platform for price
discovery is not at all used by NSE’s WDM members. Although large number of
trades are said to be facilitated by the WDM members they do not issue contract
notes so that they are not obligated to report the trades to the NSE. The brokers
have their own ways of getting compensated for the services they render to their
clients. In such a regime the investors are said to be trading among themselves
directly in the OTC market. In the OTC market, the risk of settlement is
invariably absorbed by the participants themselves as the market practice forces a
seller to give transfer instruction to the depository first before receiving the
payment by way of cheque.

future. Since DFI’s access to long-term funds had dwindled they are not in a
position to meet demand for term funds of industry and infrastructure sectors
when investment activity picks up from the present low levels. When the demand
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term debt increases significantly to finance high level of investments, continued
excessive dependence on banks is also not in the interest of good credit-worthy
borrowers, as they would end up paying up more than what they would have to
pay if they decide to raise funds from the market directly.
16. Indian investors in general are new to the debt market although most of the retail
investors do prefer fixed income assets like bank deposits, postal savings
schemes, etc. To entice these investors to the debt market, it would be necessary
to assure them of reasonable level of liquidity in the secondary market for debt
instruments. In the case of the fixed income assets such as bank deposits or postal
savings schemes, the investors are protected in regard to both the principle value
of investment and the rate of return. However, principal value of the debt
instruments traded in the secondary market may not always be equal to their
original investment value. Given the present comfort of protected investment,
most of the investors would not be willing to live with the idea of decline in the
bond value in the absence of a highly liquid secondary market. Conscious efforts
therefore need to be made to create liquidity in the debt instruments by
encouraging market makers who would give two-way bid and offer quotes with
reasonably narrow spreads. Once the investors are convinced that they are assured
of liquidity in the market their willingness to shift from the currently popular
fixed income assets like bank deposits to tradable debt instruments like corporate
debentures would be greater. As of now the average investors are not yet aware of
the advantages of investing in debt instruments that are traded in the market.
Tradable debt instruments are yet to catch fancy of most of the average investors
although they prefer to invest major part of their savings in the fixed income
securities. Therefore, it is more a matter of developing investors’ tastes for such

instruments need to be suitably resolved before an active market for such debt
instruments could develop.
19. During the last decade significant quantum changes have taken place in the
quality of the equity market. In terms of efficiency and transparency it is now
ranked among one of the best markets globally. In contrast the corporate debt
market continues to remain in a highly undeveloped state. Given the significantly
larger requirements of debt funds that will be needed to significantly step up
growth of manufacturing and infrastructure sectors very high priority has to be
accorded to the growth of the corporate debt market. Widening and deepening of
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the corporate debt markets should form an essential package of the financial
sector reforms. As an integral part of this strategy the corporate sector should be
facilitated to raise large funds from the market to meet its growing needs. Hence,
developing corporate debt market should become one of the very high priority
items in the financial sector policy reforms. Given the numerous problems/hurdles
facing the corporate debt market, the reform package needs to have two
components. The first set reforms should be of an enabling nature that involve
removal of the hurdles that the debt market faces by amending the legislative
framework that determine the regulation of the securities markets as also the tax
treatment of the debt both at the issuance stage and also trading in the secondary
markets. The second set of reforms should involve proactive steps to enlarge
issuer base and development of secondary market institutions and market makers.
20. Constitution of the High Level Expert Committee on Corporate Bonds and
Securitisation: One of the announcements in Budget 2005-06 under paragraph
86(iv) was to appoint a High Level Expert Committee on Corporate Bonds and
Securitisation that would look into the legal, regulatory, tax and market design
issues in the development of corporate bond market. Pursuant to this
announcement, Finance Minister has approved the constitution of the said
committee under the Chairmanship of Dr. R. H. Patil (notification in Annexure – I

and measures necessary for their regulation.
f. Recommend system for information dissemination.
g. Recommend measures necessary for developing the participation of small
investors in the debt markets including examination of any regulations that
inhibit such participation.
h. Recommend policy actions necessary to develop bond insurance in the
country.
22. The Committee held six meetings to deliberate on the issues raised by the
members and the Committee also invited the industry bodies like CII and FICCI
to present their standpoints on the subject.
23. The Committee formed two sub-groups as follows:
a. The sub-group under the guidance of Shri. Prithvi Haldea, Member looked
into Primary Market Regulations for Development of the primary market;
b. The sub-group on Secondary Market (Trading, Clearing & Settlement,
Novation issues) under the guidance of Smt. Chitra Ramkrishna looked
into secondary market issues and suggested measures to improve liquidity
in the market.
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24. In order to recommend a roadmap for the development of the corporate bond
market in India, it is required to look at the global markets like US, Japan, South
Korea, etc. and understand how these markets have been able to set up efficient
and vibrant corporate debt markets. It is required to take lessons from these
markets and frame suitable policies for a sustainable development of the corporate
bond market in India.
25. The Committee acknowledges with thanks the contribution made by Shri.
Rajendra P Chitale and Shri. Somsekhar Sundaresan for Chapter IV of the Report.
26. The Committee also acknowledges the significant contribution made by Dr.
Golaka C Nath and Shri. Ravi Rajan for preparation of the draft chapters,
undertaking the study of various global markets and coordinating the meetings.

1. Dr.R.H.Patil Chairman
2. Representative from RBI not below the rank Member
of Executive Director
3. Nominee of SEBI not below the rank of Member
Executive Director
4. Member, Legislation, CBDT Member
5. Shri U.K.Sinha, JS(CM), DEA Member
6. Shri C.B.Bhave, MD, NSDL Member
7. Smt.Chitra Ramakrishna, Dy.MD, NSE Member
8. Representative from IBA Member
9. Representative from Life Council Member
10. Representative from FIMMDA Member
11. Shri Rajeev Lall, IDFC Member
12. Shri Prithvi Haldea, Prime Database Member
TERMS OF REFERENCE
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The Committee will look into and make recommendations on the following
issues:-
1. Identify the factors inhibiting the development of an active corporate debt market
in India.
2. Recommend policy actions necessary to develop an appropriate market
infrastructure for development of the corporate bond market.
3. Recommend specific actions necessary to develop mechanisms for
- trading platform
- clearing and settlement system
- risk management
- novation
4. Measures necessary for inducing the emergence of market makers.
5. Identify the different kind of intermediaries necessary for the bond market and

6. Shri C.B.Bhave, MD, NSDL Member
Managing Director,
NSDL,
Mumbai.
Fax: 022-24972979; 24976351
7. Smt.Chitra Ramakrishna, Member
Dy. Managing Director,
NSE
Ph. 022-2659-8200/01 , Fax: 022-26598121
8. Shri K. Unnikrishanan
Senior Vice President Member
World Trade Centre Complex Centre,
Cuff Parade, Mumbai-400005
Ph:022-2218 2030;Fax:022-22184222
9. Shri S.V. Mony Member
Secretary General ,
Life Insurance Council,
4
th
Floor , Jeewan SewaAnnexe Building,
S.V. Road, Santa Cruz West,
Mumbai-54
Fax:022-26103304,26103306
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10. Shri C.E.S Azariah Member
Chief Executive Officer,
FIMMDA
81,8
th

countries like India are in their infancy and require a clear vision and roadmap for
their development.
2. For corporate debt markets to develop on sound lines there should be large
number of issuers who need to raise resources through the bond route as also large
number of investors who are willing to hold these instruments as a profitable
opportunity. It has been observed that in almost all the countries that have well
developed debt markets the main investors in debt instruments including the
corporate debt instruments are the institutional investors. In the US, banks in
particular play an important role in facilitating issuance and distribution of the
marketable debt of their clients to earn fee based incomes; the banks also hold
such instruments in their portfolio for generating profits through their treasury
operations. In the US, the mutual funds are one major class of investors in the
corporate debt as nearly one-half of the asset portfolios of the mutual funds is in
the form of various class of debt securities including corporate bonds. Insurance
companies and pension funds are the other set of major investors in debt
instruments. In many countries funds under management of institutional investors
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have been growing faster than the supply of local instruments in which they can
invest.
3. The global issuance of debt has been on the rise. The outstanding debt for all
countries increased from US$ 9186 billion to US$14056 billion in March 2005.
Figures on debt released by Bank for International Settlements (BIS) indicate that
the size of outstanding debt issued by financial institutions and private corporate
sector has almost doubled since 1995. The size of the corporate bond market of a
country in relation to its GDP varies from country to country depending on the
extent to which its corporate debt market has developed. The US has a huge
corporate debt market which accounts for 22percent of its GDP, followed by
Japan with 16percent and Euro area with 10percent of GDP.
4. Cross country analysis suggests that countries with larger outstanding government

Primary Market:
6. The corporate bond market in the United States is the largest corporate bond
market in the world in terms of both dollar value issued and turnover. In 2004, of
the total bond issues made globally, the US accounted for 44percent with Japan
featuring as the second largest at 15.2percent. The U.S. market is well diversified
and consists of: Agency Mortgage Backed Securities; Federal Agency Securities;
Treasury Bonds; Corporate Bonds; Asset Backed Securities; and Municipal
Bonds. The experience of the U.S. bond market is a clear indication that a well
diversified bond market can help channel resources both to the private sector and
the government.
7. The corporate debt outstanding in US has been steadily increasing over the years
and as of first quarter of 2005, the total outstanding corporate bonds stood at
US$4894.2billions. Table II-1 gives the outstanding level of public and private
bond market debt in US. The amount outstanding in corporate debt is higher than
the US treasury securities. Corporate debt constituted about 20percent of the total
outstanding debt. However, it is lower than the mortgaged backed securities that
account for 23percent of the outstanding debt.
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Table-II-1: Outstanding Level of Public & Private Bond Market Debt (US$ billion)
Year Municipal
U.S.
Treasury
(1)
Mortgage-
Related
(2)
Corporate*
Fed
Agencies

(1) Interest bearing marketable public debt.
(2) Includes GNMA, FNMA, and FHLMC mortgage-backed securities and CMOs and non-agency MBS/CMOs.
(3) Includes commercial paper, bankers' acceptances, and large time deposits.
(4) Includes public and private placements.
Sources: U.S. Department of Treasury, Federal Reserve System, Federal National Mortgage Association,
Government National Mortgage Association, Federal Home Loan Mortgage Corporation, Thompson Financial
8. The primary issuance through private placement is higher for debt with about
US$515.5billion in 2004 vis-à-vis US$28.9billion for equities. The private
placement has been going through ups and downs in US and it went down
drastically to US$307.1billion in 2002 from US$510.5billion. Table II-2 gives the
details of private placement market in US.
Table-II-2: PRIVATE PLACEMENTS, 1999-2004 (US$ Billion)
Value of U.S. private placements Number of U.S. private placements
Year Debt Equity Total Debt Equity Total
1999 368.80 77.70 446.50 3,285 462 3,747
2000 358.70 124.40 483.20 2,879 661 3,540
2001 510.50 80.60 591.10 2,063 809 2,872
2002 307.10 40.50 347.50 1,779 568 2,347
2003 489.40 28.80 518.20 2,630 533 3,163
2004 515.50 28.90 544.50 2,714 547 3,261
Source: Thompson Financial Securities Data; Securities Industry Association.
9. As of end-2004, foreign investors held about a quarter of all corporate bonds.
They own an even higher proportion of marketable US Treasury obligations,
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$1,870 billion out of $4,372 billion or about 43percent. The foreign investors
have played a dominant role in the US bond market. The foreign holdings have
been steadily increasing and in 2004, the same was outstanding at
US$1775.50billion. Table-II-3 gives the foreign holdings of the US securities.
Table-II-3: Foreign Holdings of US Securities, 1995-2004 (US$billion)

22
US$37billion compared to US$56billion for the NYSE. Bond investors include
retail investors with small portfolios, as well as the largest institutional investors.
According to NYSE, 92percent of the par value of all debt traded in US capital
market is traded OTC. Currently NYSE’s Automated Bond System (ABS)
provides a market for less than 1percent of corporate bond trading. The settlement
agencies like FICC provide Real Time Trade Matching System (RTTM) for the
OTC trades. The OTC market dominates the corporate bond market in US while
stock exchanges have not been able to attract the participants into their fold.
12. A study by NASD shows that about 60percent of retail investors do not
understand the risk associated with bonds. However, about 65percent of
transactions in the corporate bond market are in quantities of fewer than 100
bonds or amounts less than US$100,000 in par value. The trend shows that retail
participation in corporate bonds will continue to rise. A recent study by SEC
economists found that the transaction costs decline when corporate bond prices
become transparent.
13. In 1998, former Chairman Levitt noted that "[t]he sad truth is that investors in the
corporate bond market do not enjoy the same access to information as a car buyer
or a homebuyer or, dare I say, a fruit buyer."
2
To address the lack of price
transparency in the corporate debt market, Chairman Levitt called on the NASD
to do three things: (1) Adopt rules requiring dealers to report all transactions in
U.S. corporate bonds and preferred stocks to the NASD and to develop systems to
receive and redistribute transaction prices on an immediate basis; (2) Create a
database of transactions in corporate bonds and preferred stocks. This would
enable regulators to take a proactive role in supervising the corporate debt market,
rather than only reacting to complaints brought by investors; and (3) In
conjunction with the development of a database, create a surveillance program to
better detect fraud in order to foster investor confidence in the fairness of these

included abolition of securities transaction tax, deregulating brokerage
commission, preparing legal framework for securitization, allowing banks to issue
straight (unsecured) bonds, and introduction of registration system for securities
companies.
16. Japanese non-financial corporate liabilities have tended to rely on bank
intermediated lines of credit, so the Japanese corporate bond market accounts for
a smaller share of fixed income securities outstanding than other G7 developed
markets. The role of asset securitization in Japan has evolved from being
predominantly a method of raising funds for corporates' asset financing to
restructuring for corporates under bankruptcy and reorganization. Securitization
transactions done on the basis of the latter were quite evident following the Asian
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financial crisis in 1997. From residential and real estate mortgages, the range of
underlying assets has expanded to include bank loans to businesses. For
developing the asset-backed securities market the Bank of Japan (BOJ) has
included asset-backed securities as part of BOJ's eligible securities to be
purchased.
17. There are no specific rules restricting the participation of retail investors in
Japanese bond markets. Investors in Japan’s bond market comprise individual
investors, the Postal Savings System, Postal Life Insurance Service (Kanpo),
public and corporate pension fund systems, investment trusts, licensed banks, and
insurance companies. Among the major market participants in Japan’s bond
market are domestic and foreign securities companies that serve as dealers,
brokers, traders, and underwriters in the primary and secondary markets.
In October 2004, the MOF launched a new primary dealer system, the JGB
Market Special Participant Scheme. Initially composed of 25 banks and securities
companies approved by the MOF, the system is designed to promote adequate
financing, and to maintain or increase liquidity, competitiveness, transparency,
and stability in the JGB market. JGB Market Special Participants can take part in

2000 655.80
2001 613.80
2002 683.00
2003 769.70
2004 787.30
(Source:BIS - International Financial Statistics (Table 16B) )
20. Highest rated triple-A and especially double-A rated borrowers have historically
dominated the non-government bond segment of the yen market. Although such
borrowers continue to account for over half of new issuance, single-A rated
entities have become relatively more active. Also, whereas in the past issuance
tended to be concentrated in medium-term maturities, non-government issuance
of longer-dated bonds is picking up. Notably, in contrast to the dollar and euro
markets, there appears to be little competition among non-government borrowers
in the yen market to offer potentially liquid securities. The average size of new
international issues is much smaller in the yen market than in the other major
markets, and there are few instances of very large offerings by non-government
borrowers.
21. The corporate bond issuance is dwarfed by the Government bond issuances. In the
year 2004, only Yen6273billions worth of corporate bonds were issued through
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